IRS Suffers Second Setback In Abusive Tax Transaction Court Case

by Mike Godfrey, Tax-News.com, Washington

04 November 2004

The US Court of Federal Claims in Washington has rejected a claim by the Internal Revenue Service that an industrial firm, Coltec Industries, used sham transactions in order to avoid taxes, representing the second defeat for the agency in a tax shelter case in the space of two weeks.

The IRS argued that Coltec, a maker of aircraft landing systems, had used a transaction known as a contingent liability deal to generate capital losses which the firm used to offset capital gains from the sale of a business unit in 1996.

However, Judge Susan Branden rejected the IRS’s argument that the transactions had no economic purpose, and stated that in her opinion Coltec had complied with all the statutory requirements laid down by Congress.

Awarding Coltec an $82.8 million refund, Judge Branden suggested that: “The use of the 'economic substance' doctrine to trump 'mere compliance with the code' would violate the separation of powers" as laid down in the US Constitution.

Last month, the IRS suffered a similar defeat in a case involving Black & Decker Corp., where an US district court in Baltimore upheld the firm’s right to a $57 million refund centred on a transaction that the agency deemed abusive.

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